How have other startups handled stock option vesting during an unpaid leave of absence? We have a key team member who will need to take a 3 month leave of absence in the spring to complete his dissertation and receive his PhD degree. By the time he will need to go finish his degree he will have been working for us for about 6 months.
To recognize the key contributions he has already made and encourage him to remain with us after graduation we would like to go ahead and let him start vesting (standard 4 year schedule with1 year cliff, monthly thereafter) but will need to adjust it to reflect the 3 month leave in the spring. My preference would be to keep it simple and have vesting suspended on a monthly basis during any leave of absence. Upon returning to the company, vesting would simply pick up where it left off.
How have others handled this? Any lessons learned?
Stock option vesting during a leave of absence
Answers
I have done this but the ability to do so was stated in both our option plan and the employee's option agreement. I would tread very carefully (which I'm sure you are) and ask counsel about what you CAN do b/c option plans are very specific things and employees can be very litigious.
In addition to getting an opinion that your plan allows this I would get a signed agreement from the employee that states that they understand and agree to whatever vesting changes you are making.
In the final analysis it may simply be worth it to let the employee vest straight through...
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Thanks for your comments Jeff. Yes, our option plan does provide us with the flexibility to change vesting schedules as needed. I think we are now weighing the pros and cons of the practical side. It's tough since this is an important, but recent addition to the team and his leave could last anywhere from 3-6 months. I am wondering if it makes more sense to give him a smaller grant that vests upon completion of this 6 month project (more like a contractor) and then just have a new and separate grant with standard vesting once he joins full time towards the end of 2010.
If the original grant has already been made, you should definitely consult with counsel on this. If the original grant is an ISO, there are
If the original grant has not been made yet, you may want to consider granting him an NSO which does not have employment status restrictions and can continue to vest during the LOA, or stop vesting, as the company decides. Then, as you mention, you can later grant him an ISO when he comes back to work as a full time employee.
It sounds as though he was hired with the knowledge that he was working on his PhD and that this made the employee, a desirable employee to have. If having his PhD makes him a more valuable employee for the company to have (and you have already mentioned that he is a key employee who has made contributions), why even alter his vesting schedule for the 3 months that he is gone? Is he still to be considered an employee at the company? Unless it is spelled out that he can not vest during this LOA in his Employment Agreement and the Option Plan, consider not doing anything. You will end up with an employee who will be VERY appreciative for your understanding of his situation.
GENERAL ADVICE: Just leave the option award and vesting alone - don't do anything. As long as the employee doesn't resign after earning his/her PhD then, you've accomplished what you wanted, at very little 'real' investment.
LEGAL ADVICE: Any advice offered here will be inadequate because we don't know what jurisdictions prevail for your company (i.e., Federal / ERISA, etc.) which has a huge bearing on the rules, nor the full circumstances of your Options Plans. I encountered this re: an FMLA-sanctioned leave -- even then I found out that its tricky; the rules are subject to interpretation. Thus, ASK YOUR COUNSEL.
Since he is still considered an employee (you have allowed a leave of absence), the options must remain in place and vest as though he was still actively working for the company. For future SNAFUs like this, you could write a policy (with legal counsel consent) if you prefer the options not vest during sabbaticals, including your own.
Although on sabbatical, he is technically still an employee of the company and expected to return to work after his approved unpaid leave of absence.